Blackstone in America

About Me

I am a graduate of Harvard Law School, currently in private practice. My specialty is corporate governance. Politically, I subscribe to classical liberalism (synonymous with some strands of libertarianism), with a touch of conservatism when it comes to making drastic changes.

Wednesday, May 13, 2009

How Much Do We Know about the Phenomena That Economics Purports to Explain?

As I've pointed out elsewhere in this blog, Judge Posner argues in A Failure of Capitalismthat depressions are poorly understood, and that where hard data is in short supply, preconceptions will fill the void.

That argument came to mind today when I read Judge Posner's latest post on his "Failure of Capitalism" blog. He is describing the causes of possible "aftershocks" of a depression:

The government has created a great deal of money, and borrowed a great deal of money, to finance the bailouts and the stimulus package and increase the amount of money in circulation (to help push down interest rates). If when demand rises the banks lend their $800-plus billion in excess reserves, the ratio of money in circulation to the output of goods and services is likely to rise--and this will mean inflation. The ratio will rise further if the government decides to finance some of the huge additional debt that it is incurring as a result of its anti-depression expenditures by increasing the money supply, that is, by inflation, which is a form of taxation--taxation of cash balances. A low rate of inflation is manageable and does little economic harm, but a high rate is very harmful, and can be broken usually only at the cost of a sharp recession (consequent upon a sharp rise in interest rates in order to reduce the amount of lending and hence the amount of money in circulation). And the recession might (as in 1937) disrupt a recovery from the depression. These costs have to [be] balanced against the benefits of the anti-depression programs; unfortunately only guesses are possible.

The last point -- "only guesses are possible" -- leads one to wonder how we should choose between the "guesses" of Keynesian economists and the "guesses" of "conservative" economists. Both sides make plausible arguments that rely partly on hard research but also partly (largely?) on naked reasoning. What would be worse -- a deflationary spiral (assuming the absence of bailouts and stimulus spending would have resulted in one), or post-depression inflation, or a double-dip depression? Not to mention permanent growth in the scope of government. Whose bogey is more likely to be real? Whose would be worse if real?

UPDATE: After posting this, I noticed that economist Arnold Kling has a post today touching on what appears to be the same uncertainty. He passes along the Three Iron Laws of Social Science: (1) "Sometimes it's this way and sometimes it's that way." (2) "The data are insufficient." And (3) "The methodology is flawed."

Tuesday, May 12, 2009

The Decline of "Intellectual" Conservatism

Judge Posner -- at his other blog -- has a fascinating post on the recent history of conservatism in the United States. He argues that, today, the intellectual underpinnings of conservatism are "weak." Conservatism now has no one filling roles comparable to those of William F. Buckley, Milton Friedman, et al. It has grown "strident and populist."

Judge Posner puts this in autobiographical terms:

By the end of the Clinton administration, I was content to celebrate the triumph of conservatism as I understood it, and had no desire for other than incremental changes in the economic and social structure of the United States. I saw no need for the estate tax to be abolished, marginal personal-income tax rates further reduced, the government shrunk, pragmatism in constitutional law jettisoned in favor of "originalism," the rights of gun owners enlarged, our military posture strengthened, the rise of homosexual rights resisted, or the role of religion in the public sphere expanded. All these became causes embraced by the new conservatism that crested with the reelection of Bush in 2004.

* * *

By the fall of 2008, the face of the Republican Party had become Sarah Palin and Joe the Plumber. Conservative intellectuals had no party.

The reactions to Judge Posner's A Failure of Capitalismdemonstrate his point. So far, no one on the right, as far as I know, has engaged the book's arguments regarding market failure and re-regulation. Conservative magazines seem not even to have acknowledged that the book exists. It does not fit the conservative conventional wisdom and therefore must be either ignored or shouted down.

Thursday, May 7, 2009

Book and Blog Combo

Richard Posner continues to, in effect, revise and enlarge his latest book, A Failure of Capitalism, by posting timely short essays on his blog of the same name. His most recent entry, posted last night, evaluates the government's various responses to the depression so far. I'm pleased that, among other things, he takes the President to task for "leading the attack on the resistance of Chysler's secured creditors (whom he referred to unhelpfully as 'speculators,' when the government is desperate to encourage lending, including by lenders who will not lend without collateral that gives them a favored position should the borrower go broke)...."

This is the first time I've made intensive use of a book-blog combination. It works especially well here, because the book appeared in the midst of a crisis that is not yet ended and will have ramifications far into the future. Hearing Judge Posner's views on the changing situation is fascinating. They enhance the usefulness of having read the book, by causing me to employ what I picked up from the it. And the background knowledge provided by the book enables me to fit the blog updates into a larger argument.

Wednesday, May 6, 2009

Auto Bailouts and Bankruptcies

Today's post (really, late last night's post) on Judge Posner's Failure of Capitalism blog discusses the auto bailouts, the second stimulus package (which was passed after he finished the book), and bank stress tests.

In the book, Judge Posner argued that the auto bailouts were necessary simply to keep the major auto companies from collapsing when uncertainty about the course of the depression was highest. Their utility lay in delaying bankruptcy, not in making the companies viable again.

Today, some five months later, Judge Posner observes that the bailouts "worked." They kept the companies from failing at the height of public fear, when there was the greatest risk of a deflationary spiral. But by the end of March, the generalized, public fear had largely subsided. Thus, the bankruptcy of Chrysler and likely bankruptcy of GM do not raise the same concerns they did in December.

Although Judge Posner does not say this, it would therefore appear that there is now no emergency that could justify the administration's efforts to strong-arm Chrylser's bondholders.